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Fidelity Special Values PLC

A different view of UK companies

Alex Wright, Portfolio Manager, Fidelity Special Values PLC, October 2017

To be a contrarian investor means to focus your attention on stocks and sectors that have fallen out of fashion in the market and trade on cheap prices due to a lack of demand. The chief advantage to this approach is that, if done well, it improves the balance of risks and rewards by limiting your downside and maximising potential upside.

This is because companies that are out of favour have probably disappointed investors in the past, meaning current expectations are low and therefore, the chances of further disappointment leading to steep falls in share prices are lower.

Behavioural biases prevent many investors from anticipating positive change in unloved companies. In some cases, those changes will go further than we expected, driving both an earnings recovery and a significantly higher valuation. These stocks which transition from value to growth are where we make outsize returns for our shareholders.

This philosophy and approach has underpinned the management of Fidelity Special Values PLC not only under the last five years of my management, but since its launch in 1994. Investing against the tide is a psychologically difficult thing to do. Humans are social animals, and behave socially when making investment decisions. It takes a particular mindset and a highly disciplined approach to execute a contrarian investment process successfully.

Investing against the tide is a psychologically difficult thing to do. Humans are social animals, and behave socially when making investment decisions. It takes a particular mindset and a highly disciplined approach to execute a contrarian investment process successfully.

Fidelity Special Values PLC past performance

Source: Fidelity International, 31 August 2017. Alex Wright was appointed to the trust 01/09/2012

Past performance is not a guide to the future.

Source: © 2017 Morningstar, Inc. All Rights Reserved. Fidelity International, 31 July 2017. On a bid-to-bid basis with income reinvested in GBP terms. Launch date: 17 November 1994. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only.

Central to the long-term success of our approach has been company research and making full use of the insight and expertise of our large team of analysts. Fidelity’s philosophy is to base investment decisions on company fundamentals such as competitive position, management strength, growth opportunities, valuation and so on. Overarching trends in the economy (top-down factors) play a supplementary rather than primary role in our investment decisions.

Our investment team spends many thousands of hours meeting company management, speaking to suppliers, competitors and customers in order to build up a picture of the true state of a company’s fundamentals. It is this work that allows us to form a view of the company’s future profitability and ultimately whether we consider it an attractive investment for our shareholders.

The benefits of a closed-end structure

In many ways, an investment trust is naturally sympathetic to the rhythms of contrarian investing. As the trust has a fixed number of shares - so every buyer needs a seller - I do not have to manage the daily inflows and outflows that occur in open-ended funds as a result of investors buying or redeeming units.

The major consequence of this is that I’m able to position the portfolio to fully and directly express my investment views, rather than be forced into trading decisions by client activity, which can sometimes result in being forced to sell holdings into unloved markets or vice versa. This means we can spend more time on company research and stock selection rather than cashflow management.

This characteristic is also particularly advantageous in the context of our investments in smaller companies, where liquidity can often be a constraining factor. The trust has a structural bias towards small and medium-sized firms - as this segment is less widely covered by mainstream analysts it tends to create more opportunities to identify positive change that others are overlooking or underappreciating.

The closed-end structure of the trust also provides enhanced investment powers and the ability to use gearing to amplify the portfolio’s market exposure. This can increase overall portfolio volatility, but if implemented effectively it has the potential to improve long-term performance and provides the flexibility to deliver returns across a wide range of market conditions.

The trust’s net gearing is actively managed; so when valuations are depressed and I’m finding a large number of investment ideas, the portfolio’s net exposure is likely to increase. Conversely, when the broader market rallies strongly the level of gearing would generally tend to reduce as aggregate valuations rise.

Fidelity Special Values PLC - net exposure vs market over Alex Wright’s tenure

Source: Fidelity International, 31 July 2017. Alex Wright tenure since 1 September 2012.

This is highlighted to good effect in the above chart. For example, as the FTSE All Share has rallied strongly since the summer months of 2016, the trust’s net gearing (i.e. its overall market exposure) has trended downwards. This is in contrast to how we managed the portfolio between July 2015 and April 2016 where net gearing increased as the broader market fell.

Such periods of market volatility often create a favourable environment for contrarian stockpicking. This is worth highlighting today given the looming political and economic uncertainty as the UK prepares to leave the European Union. Among Warren Buffet’s many pearls of wisdom, ‘be fearful when others are greedy, and greedy when others are fearful’ remains as pertinent today as it ever has been.

Past performance is not a reliable indicator of future results. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. The value of investments can go down as well as up so investors may get back less than they invest. Overseas investments are subject to currency fluctuations. The investment trust can gear through the use of bank loans or overdrafts and this can be achieved through the use of derivatives. Where this is the case, their use may lead to higher volatility in the Net Asset Value and Share Price. Some investment trusts, like Fidelity Special Values PLC, invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The latest annual reports and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. Fidelity has been licensed by FTSE International Limited to use the name FTSE All-Share Index. Issued by Financial Administration Services Limited, authorised and regulated in the UK by the Financial Conduct Authority. Fidelity, Fidelity International, The Fidelity International logo and F symbol are trademarks of FIL limited.

Registration information

Registered in England and Wales; registration number 02972628.

Registered office: FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.

Fidelity Special Values PLC is a member of the Association of Investment Companies.
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